Recent developments in bank regulation, enforcement, and litigation

FDIC

In a major blow to the bank regulators’ enforcement powers, the Fifth Circuit Court of Appeals has stayed an FDIC order of removal, finding a strong likelihood that the FDIC’s use of administrative law judges (ALJs) violates the Constitution. The case is Burgess v. FDIC and arises from the FDIC’s allegation that Cornelius Campbell Burgess, a director and former officer of Herring Bank, violated bank laws and regulations by charging personal expenses to the Bank. The FDIC sought a civil money penalty and order of removal and prohibition against Burgess. An FDIC ALJ recommended granting the civil money penalty and the order of removal (a decision I wrote about here), and the FDIC Board accepted the recommendation. Burgess appealed the FDIC’s decision to the Fifth Circuit and asked the court to stay the implementation of the order of removal until deciding the merits of the case. On September 7, the Fifth Circuit granted Burgess’s motion to stay.

On April 27 and 28, I had the privilege of attending the Texas Bankers Hall of Fame and Bank Executives’ & Directors’ Seminar hosted by Sam Houston State University. I would like to congratulate the five Hall of Fame honorees: B.A. Donelson, Jack Griggs, George Martinez, Milton McGee, Jr., and the late Milton Payne. I enjoyed hearing about all of their incredible accomplishments and contributions to community banking in Texas. Congratulations on the well-deserved recognition!

Just like last year, the Seminar provided valuable information to the community bankers in attendance. As an attorney representing community banks, I was most interested in the bank regulatory panel. The panel was again moderated by Sam Golden, formerly with the OCC and now a bank consultant with Alvarez & Marsal. The panelists were Bobby Davenport (Texas Department of Banking), Nathan Heizer (FDIC), Bernadette Hernandez (OCC), and Robert Triplett (Federal Reserve). For those who were not able to make it to the Seminar, I have recapped some of the most helpful information that the regulators shared:

A federal appeals court in Chicago recently ruled that Builders Bank could move forward with a lawsuit against the FDIC challenging the bank’s CAMELS rating. Although the decision noted the uphill battle of challenging regulators’ CAMELS ratings in court, it opens the door to such suits by finding that banks may have the right to challenge all but the capital portion of the CAMELS rating.

With lending driving revenue and profitability for most community banks, it comes as no surprise that credit risk problems are at the heart of most matters requiring attention issued by bank regulators. Although credit risk issues are specific to each bank’s particular lending activities, the OCC and FDIC have noted recent trends in credit risk. This post discusses the trends that may be important to community banks and provides guidance for avoiding an MRA related to credit risk.

Last month, the Department of Justice (DOJ) filed a civil rights lawsuit accusing KleinBank, a Minnesota-based community bank, of violating fair lending laws by engaging in the practice of “redlining” by denying mortgage loans to predominantly minority neighborhoods. The DOJ’s complaint alleges that KleinBank “engaged in a pattern or practice of unlawful redlining by structuring its residential mortgage lending business so as to avoid serving the credit needs of neighborhoods where a majority of residents are individuals of racial and ethnic minorities, in violation of the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA).”

On January 11, 2017, an administrative law judge (ALJ) issued a 176-page recommended decision finding merit in the FDIC’s charges that a Texas banker engaged in unsafe and unsound banking practices and breached his fiduciary duties. The case arose out of the FDIC’s allegation that the Respondent ignored Bank policy and misused Bank resources by paying personal expenses from Bank funds, failing to keep adequate records of his expenses, and concealing information relating to his misuse of Bank funds. The ALJ sustained the FDIC’s charges and recommended that the Respondent be banned from banking activities and fined $200,000. The recommended decision contains important information for banks regarding proper business expense policies and the scope of unsafe and unsound practices.

With major changes coming in Washington and important cases making their way through the court system, 2017 looks to be a busy year for bank litigation and regulation. This includes litigation and legislative challenges to the CFPB’s authority, enforcement actions involving allegations of unsafe and unsound banking practices, lawsuits over the validity of credit union regulations, and litigation surrounding the Wells Fargo fake account scandal.

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About

This blog is a resource where community bankers can find timely information about legal issues affecting their business, including recent regulatory and enforcement issues. The author, Tyler Bexley, is a commercial litigator and regularly represents banks and their officers and directors in litigation, regulatory enforcement proceedings, and other commercial disputes. Read more